~ Thoughts about real estate from the group in Guelph

Valuation: Property vs. Fine Art

Fine art and property share many characteristics which make an appraiser’s job much harder. Looking at the problems facing appraisers of fine art may be instructive to property appraisers: you may realize who has the easier job.

First, both fine art and property are similar in many ways: they are differentiated in many ways, trading them incurs high transaction costs (fee paid by seller of about 10- 15 percent plus another fee paid by the buyer of about 10- 25 percent), and the value of an item is widely debated and highly personal (i.e. there are wide variations amongst potential buyers).

There was general agreement that fine art is not an investment commodity. But, after listening to a panel discussion at the recent RICS conference in Toronto, I think that property appraisal is much easier.

Property appraisers do not have to worry about whether the property is what it says it is; forgery is common in art. (But, oddly, some known forgeries are valuable on their own).

The cost approach to valuation is completely silly: e.g. the cost of time and material needed to make the most expensive painting (USD $259m, $19m per sq. ft.) differ little from the cost of art sold at a starving artists art fair (probably produced on an assembly line in Dafen, China). And, during an artist’s lifetime, only a small fraction of the selling price goes to the artist as earned income: it is not a cost of time.

The income approach is possible for some paintings (think of how much money the Louvre must be making by selling the rights to make post cards showing the Mona Lisa). But that method is useful only for the most famous paintings.

That means that the best way to value a piece of art is by using “comparables”: e.g. to estimate the market price for a painting by Pablo Picasso, one should consider the prices of other paintings by Picasso. Unfortunately, a piece of art is not merely differentiated but (almost) unique. Picasso, in particular, is associated with different styles at different times in his life. On the other hand, some artists (e.g. Andy Warhol, Damien Hirst) produce variations on a theme once they find something which is popular (i.e. the items most commonly in need of appraisal).

The session had a number of other thought-provoking factoids: only 50 artists had their art sell for more than 10 million euros in 2013 while 38 percent of art sold for less than USD $1000. Picasso is a bit of a special case, for several reasons: this data base of more than 27,000 items estimates that the total value of the pieces of his work sold during 2013 was more than $550 million in 2013. And he is not top of the list.

The more that I listened to the panel, the more I came away thinking that valuing property is a lot easier. Especially during the question and answer period, the answers were interesting but indirect. Most of the experts spoke in something like a British accent, offering exciting anecdotes about piece of art and superlative examples with breathless details until you forget your question. So, I can believe the sincerity of the audience member who said that some people “are willing to pay anything to get what they want.” (okay but, at any auction, there is one winner and one or more losers who are not willing to go as high).

Are prices stable enough to be analyse-able? You can learn more by taking a one week course in art appraisal for about $1700 (if not a member of the International Society of Appraisers). Or, you can enrol in many years of courses with the Appraisal Institute of Canada to learn how to appraise property. (My advice is that there is more need for the latter.)